FIN 515 Week 6 Problem Set Managerial Finance Course Project #2

What inherent characteristic of corporations creates the need for a system of checks on manager behavior?
Answer: In corporations perspectives management and ownership are two different entities. However, in corporation there are two different bodies who are control the operation and those who have investment in corporation. This creates a clear conflict of interest and this conflict between the investors and managers creates the need for investors to devise a system of checks on managers - the system of corporate governance.

2. What are some examples of agency problems?
Answer: examples of agency problems are excessive perquisites, such as using corporate jets for family vacations, or managers not working as diligently as they would if it were their own business. Retrieve from: Smith, Harmelink & Hasselback. Federal Taxation: Comprehensive Topics. CCH, 2013.
In corporation most of the agency problem arise when management want to spend money and board of directors think in other way. They want reduce expense to maximize profit.


3. What are the advantages and disadvantages of the corporate organizational structure?
Answer: The conflicts between those who control the operations of a firm and those who supply capital to the firm are as old as the corporate organizational structure. Shareholders use a combination of incentives and threats of dismissal to mitigate this conflict. Retrieve from: Smith, Harmelink & Hasselback. Federal Taxation: Comprehensive Topics. CCH, 2013.
From all discussion we can say that this separation comes at a cost that the managers will act in their own best interests, not in the best interests of the shareholders who own the firm. This critical separation allows a wide class of investors to share the risk of the enterprise.




4. What is the role of the board of directors in corporate governance?
Answer: The role of the Board of Directors includes four aspects. Firstly, the Board of Directors represents the shareholders, thus what they do is for the shareholders’ good. Secondly, the Board of Directors sets strategy for the company. They are responsible for approving and keeping track of the company’s strategy as well as annual budgets and investment programs established in the action plan prepared by the executive officers. Thirdly, the board of directors elects CEO and provides guidance to the CEO. Last but not the least, the main role of the board is to monitor the management in order to reduce total agency costs, and ensure the maximization of shareholders’ wealth.